Dragon loses firepower

In the 1980s, this southern Cantonese-speaking province was always the most daring in introducing reforms and the most tolerant of private and foreign businesses. It enjoyed the highest growth rate and got the biggest share of foreign capital coming into China. Impressed economists called Guangdong the fifth dragon, after Asia's four newly-industrialised economies of Hong Kong, Singapore, Taiwan and South Korea.

Lately, however, the young dragon has had problems growing into a full-sized industrial heavyweight. In industrial production, sales and overall growth, Guangdong is facing rivalry for the top national position with Shanghai, Jiangsu and Shandong. More foreign investors are looking beyond Guangdong for business opportunities elsewhere in China.

In 1996, the province's GDP grew a modest,year-on-year 11 per cent to Yn6lObn, but urban income grew a meagre 2.4 per cent in real terms. About 700,000 people were out of work, an unemployment rate of three per cent. This is in sharp contrast to the labour shortage of the previous years.

Loss of patronage

What has gone wrong? Many cite the loss of political patronage as the reason. Under the former Communist Party boss Zhao Ziyang, the province enjoyed favourable concessions that allowed it to grow fast and generate more wealth. Now, Shanghai is the star, which is des-tined. to get more favours from Beijing with the recent promotion of additional Shanghai officials to the inner leadership circle decided at the 15th Party Congress in September.

Other analysts say Guangdong's problems stem from structural weaknesses also experienced by the other four dragons, relying on cheap labour and competitive pricing but neglecting productivity growth and technological development. "The economic efficiency of [our] enterprises has been unsatisfactory and [our] economic structure is unbalanced," admitted the Guangdong Provincial Statistical Bureau in its annual report delivered in February this year.

Guangdong realises it needs to pro-duce higher value-added products to survive and has a 20-year development plan to nurture more high-technology and service-oriented industries. It aims to catch up with the other newly-industrialised economies by the year 2010. To do so, the province will need a lot of capital, skilled labour and strong leadership.

Greater consumption

Guangdong has come a long way from the days when it was famous only for sugar cane and remittances from over-seas Chinese. There were few industries because Beijing was reluctant to make investments in what it regarded as a battle frontline in any war against Taipei.

Guangdong's fate changed when China used the province as a laboratory for economic reform. Three of the four Special Economic Zones (SEZs) were set up in the province, offering preferentialtreatment to foreign investors. Hong Kong businessmen were the first to in-vest, setting up low-end assembly operations even when the SEZs were still with-out proper roads, water and electricity. The SEZs made up their shortcomings with tax holidays, cheap land and labour.

It was a win-win situation. Hong Kong's manufacturing capability was greatly boosted, while paddy rice fields in Guangdong made way for factories producing for the world market.

A massive inflow of foreign capital and the vigour of ambitious local governments propelled the province to grow at a rate unmatched by other places in China. Between 1978 and 1991, Guangdong's GDP grew an annual average of 18.5 per cent, compared with the national average of 12.2 per cent. Foreign trade was the engine of growth, ac-counting for a quarter of its GDP.

After two decades of break-neck industrialisation, Guangdong is finally slowing down. Its GDP growth was only 11 per cent in 1996, still ahead of the national average of 9.7 per cent, but lower than its own previous record. Between 1990 and 1994, its GDP grew an average of 20.2 per cent.

Rising competition

Guangdong is doing less well because there is more competition nationwide. Preferential treatment exclusive to Guangdong is now available in more parts of China. Its share of the nation's utilised foreign direct investmen+t shrank from 46 per cent in 1990 to 27 per cent in 1996, according to the State Statistical Bureau. Foreign investors' growing preference for other parts of China and even other countries in South-east Asia appears to have produced a drop in the amounts of capital coming into Guangdong. Foreign investment in the province in September 1997 was 24.5 per cent down on the same month last year, after a 20 per cent fall in August. Shanghai's share, mean-while, has risen from 5 per cent in 1990 to over 12 per cent by 1993 and 9.4 per cent in 1996. Foreign investors are now attracted by the potential of the Yangtze River delta.

Guangdong has also lost its edge as the leading manufacturer of consumer durables. Its textiles, food products, electrical appliances and other light-industrial items used to sell well at home, thanks to its Hong Kong-style smart design and competitive pricing. But other provinces soon caught up, grabbing from Guangdong market share in cameras, cassette tape recorders, electric fans; washing machines and television sets.

Need for technology

Faced with shrinking margins and difficult sales, Guangdong companies are investing less. In 1996, the province's fixed-asset investments grew by five per cent, compared with the national aver-age of 18.2 per cent.

Like other Asian dragon economies, Guangdong needs to move up the technological ladder and to improve ifs in-vestment climate. To this end, the province plans to. concentrate its efforts on developing energy, transport and telecommunications. It also has designated 250 major state enterprises for bolder re-form, hoping to consolidate them into big industrial conglomerates. It hopes that by the year 2000, there will be at least 50 large companies in the province, each with sales exceeding Yn5bn.

Some economists say Guangdong is over-ambitious in its industrial policy. "Guangdong doesn't have a very solid industrial base. Its manufacturing skills are weak, compared with those in Shanghai and Jiangsu," says Mr Joe Zhang, an economist at Credit Lynonnais Securities in Hong Kong.

Another hurdle is Guangdong's short-age of skilled labour. The labourers working in factories in the Pearl River Delta are mainly peasants from neighbouring provinces. Guangdong's own supply of university graduates, skilled technicians and other professionals is limited. On a per capita basis, Shanghai and Beijing are far ahead of Guangdong in this aspect. Mr Edward Leung, chief economist at the Hong Kong Trade Development Council, notes that Guangdong has been trying to lure skilled personnel from other provinces by offering higher wages ?but with limited success.

Guangdong will also need capital to finance its grand plans. Hong Kong will continue to be an important source, al-though the flow will be slower. The Guangdong Provincial Government De-

The Canton Trade Fair

The biannual China Export Commodities Fair ?more commonly known as the Canton Trade Fair ?is the oldest trade fair in China. Established in 1957, the fair was an important window on the world market during China's years of isolation.

Over the past four decades, 1.6m foreign traders have attended fairs, resulting in US$190bn of exports. Light industrial products and handicrafts are the most important export commodities, while machinery and electronic goods are the fastest-growing sectors. Commodities such as metals, grains and oils are decreasing in importance. From small beginnings the fair has grown to attract 50,000 overseas traders with more than US$3bn-worth of export deals clinched in the first seven days of the April 1997 session.

velopment Research Centre, a high-level think tank, predicts that investment from Hong Kong will grow 4-5 per cent annually until the year 2000, or an average of US$10.6bn each year.

Capital requirement

Guangdong, used to. 30-40 per cent yearon-year annual increases in foreign in-vestment, will need more billions of dollars to sustain its growth. As it is no longer offering tax holidays and tariff exemptions, Guangdong will need some-thing else, such as better infrastructure, to bring in foreign investment. Guangdong is doing just that, with a plan to build 16 expressways, a replacement airport, three main railway extensions and new power stations between 1996 and 2000. "Guangdong has relied on Hong Kong's infrastructure for years. It's time for the province to develop its own," says Tsang Shu-ki, professor of economics at the Hong Kong Baptist University.

Some Hong Kong-listed companies, such as Cheung Kong Infrastructure and New World Infrastructure, are involved in developing Guangdong's infrastructure. The Guangzhou city government also has set up a listed vehicle in Hong Kong, GZI Transport, to raise capital for toll highways throughout Guangdong.

Guangdong may not yet be a spent force. It still possesses many strengths, says Leung of the HKTDC. The province continues to handle 40 per cent of China's foreign trade and accounts for 11.4 per cent of the country's industrial output. Guangdong is still an economic powerhouse, though it now needs to work harder to realise its dream to be Asia's Fifth Dragon. ^

This sort of volume, however, is dwarfed by China's total export trade, reflecting the declining relative importance of the fair. When exporting, foreign-invested joint ventures, which ac-count for an increasing proportion of China's exports, usually use the marketing channels of their joint venture partner. Many foreign companies tend to use their representative offices to take a more proactive line in sourcing from Chinese state-owned companies.

The fair has also been criticised for the mediocre quality of some of the products displayed, a lack of space in the exhibition halls, and traffic jams and poor security in the host city. At-tempts are now being made to address these problems. There are plans to triple the current 160,000 sq metres of exhibition space and introduce more brand-name products.

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